Sept. 21 (Bloomberg) -- The Internal Revenue Service is
giving companies that have been misclassifying employees as
independent contractors a chance to pay a fraction of back taxes
to avoid interest, penalties and audits for previous years.

Under the program announced today by IRS Commissioner
Douglas Shulman, U.S. companies would have to agree to treat the
workers as employees going forward and pay 10 percent of the
previous year’s payroll taxes. The program is open to employers
of all sizes, though Shulman said he is trying to encourage
smaller businesses to participate.

“A lot of our job is to make sure that we provide clarity
for the vast majority of people that are trying to get it
right,” Shulman said on a conference call with reporters today.

Worker misclassification is a complex area of the tax code
without clear rules to guide businesses, Shulman said. Since
1978, Congress has prohibited the IRS from issuing general
clarifying regulations.

Employers are responsible for paying part of the payroll
tax as well as paying federal unemployment taxes for their
workers. Independent contractors pay the employee and employer
shares of the payroll tax.

‘Gradually Change It’

Representative Jim McDermott, a Washington Democrat who has
pushed for crackdowns on worker misclassification and has
sponsored legislation on the issue, said in a brief interview
today that the IRS action isn’t exactly what he wanted, and
called it a step in the right direction.

“They’ve been getting away with murder for years,” he
said of employers. “You gradually change it and so people begin
to see you can’t make everyone a contract worker.”

Brian Turmail, a spokesman for the Arlington, Virginia-based Associated General Contractors of America, a trade group,
said in a phone interview today that the IRS program is an
acknowledgment of how complex it is to comply with employment
classification requirements.

Within the construction industry, home building is
particularly challenging because it can involve multiple trades
and small jobs, Turmail said.

“From our perspective, there are only a few bad eggs,” he
said. “A lot of folks are trying to do the right thing, but
it’s awfully complex.”

Reclassifying Contractors

President Barack Obama in his most recent budget plan
proposed allowing the IRS to issue guidance and to require
companies to reclassify some contractors as employees. That
proposal was projected by the Treasury Department to raise $8.7
billion over the next decade.

Shulman said he didn’t have estimates of how many employers
would join the voluntary compliance program or how much money it
would generate. The program has no deadline.

The IRS just completed a voluntary compliance program for
Americans with offshore bank accounts. Shulman said part of his
approach as commissioner is to encourage long-term tax
compliance even as the agency continues auditing taxpayers for
past actions.

“The real win for American taxpayers is if we set up the
right incentives for all taxpayers to pay the right amount of
taxes this year, five years from now, 20 years from now,” he
said.